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The size effect reversal in the USA


  • Samer Al-Rjoub
  • Oscar Varela
  • M. Kabir Hassan


The paper examines the size effect reversal in the USA over the period 1970-1999, using data for the ten size deciles in the CRSP tapes during this 40-year period. Betas for small-firm portfolios increase as the return interval analysed increases, and are lower than large-firm portfolios for daily data but higher for monthly and quarterly data. Differences between small- and large-firm portfolio returns are associated with higher betas as return intervals increase, with lower betas for daily data, and higher for quarterly data. Before 1981 when the small-firm effect was published, smaller firms' relative risk coefficients were biased downwards compared to aggregated coefficients, while larger firms' were biased upwards, as expected. But after 1981, a partial reversal occurred with larger firms' relative risk coefficients also biased downwards and by more than the smaller firms. In the post-period, relative risk measures generated higher abnormal returns for large firms than for small firms, effectively a large-firm effect, because large firms' risks were more understated, possibly due to their relatively less frequent trading. However, these abnormal returns were reduced for large (and small) firms when using more appropriate aggregated risk coefficients.

Suggested Citation

  • Samer Al-Rjoub & Oscar Varela & M. Kabir Hassan, 2005. "The size effect reversal in the USA," Applied Financial Economics, Taylor & Francis Journals, vol. 15(17), pages 1189-1197.
  • Handle: RePEc:taf:apfiec:v:15:y:2005:i:17:p:1189-1197 DOI: 10.1080/09603100500359542

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    References listed on IDEAS

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    6. Dimson, E & Marsh, P R, 1983. " The Stability of UK Risk Measures and the Problem of Thin Trading," Journal of Finance, American Finance Association, vol. 38(3), pages 753-783, June.
    7. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
    8. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-193, January.
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    Cited by:

    1. Jose Fernandes & Augusto Hasman & Juan Ignacio Pena, 2007. "Risk premium: insights over the threshold," Applied Financial Economics, Taylor & Francis Journals, vol. 18(1), pages 41-59.
    2. Robert Rutledge & Zhaohui Zhang & Khondkar Karim, 2008. "Is There a Size Effect in the Pricing of Stocks in the Chinese Stock Markets?: The Case of Bull Versus Bear Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 15(2), pages 117-133, June.
    3. Jayen B. Patel, 2012. "A further analysis of small firm stock returns," Managerial Finance, Emerald Group Publishing, vol. 38(7), pages 653-659, June.
    4. Torchio Frank & Surana Sunita, 2014. "Effect of Liquidity on Size Premium and its Implications for Financial Valuations," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 9(1), pages 1-31, January.
    5. Ikram ul Haq & Kashif Rashid, 2014. "Stock Market Efficiency and Size of the Firm: Empirical Evidence from Pakistan," Oeconomics of Knowledge, Saphira Publishing House, vol. 6(1), pages 10-31, March.
    6. Tienyu Hwang & Simon Gao & Heather Owen, 2014. "Markowitz efficiency and size effect: evidence from the UK stock market," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 721-750, November.

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